Christopher Pyne proposes fining unis for debt-dodging graduates

Universities churning out graduates who do not repay their student debts would face financial penalties under a proposal by Education Minister Christopher Pyne aimed at securing Senate support for fee deregulation.

Despite a 34-30 Senate defeat on Tuesday, Mr Pyne vowed to reintroduce legislation this year to allow universities to set their own fees.

"I understand that you are concerned about the cost of unpaid HECS debt on the budget, and in particular the risk being borne of taxpayers of this cost," Mr Pyne said in his letter.

Mr Pyne proposes "a mechanism to make a proportion of each higher education provider's direct grant funding contingent on its performance against a key set of indicators" - including the debt not expected to be repaid (DNER) by their graduates.

"We are confident that the higher education sector will be responsive both to transparency of data in this area but also to a relatively modest amount of their annual grant funding being at risk in relation to their DNER performance," he said.

The government aims to have proposals ready for discussion by July. They would take into account repayment differences based on gender and rural and regional factors.

Graduates do not repay their debts if they are earning under $56,000, exit the workforce or move overseas.

The value of student debts not expected to be repaid is forecast to grow to $12 billion by 2017-18 - 23 per cent of all outstanding debt.

Former Coalition policy adviser Andrew Norton, now a higher education program director at the Grattan Institute, said: "This is a very complex solution to a problem that could be solved in a much simpler way."

It would be unfair to reduce subsidies for students because graduates who had studied 10 years before them had not repaid their debts, he said.

Small reductions in Commonwealth subsidies would probably have little impact on reducing unpaid debts while large reductions could see universities enrolling fewer disadvantaged students - especially in courses with poor repayment outcomes such as the humanities.

"The people most likely to pay back their debts are males with high ATARS," he said.

Mr Norton said it would be simpler and more effective to recoup the HECS debts of graduates who die or who move overseas.